Viewpoint: FHA and enduring the housing crisis

In late October, super storm Sandy wreaked havoc on the northeastern seaboard. A record storm surge slammed into New York City’s Battery Park. More than 7 million businesses and households in 15 states lost power. The economy lost $30 billion to $50 billion. The federal government’s response reaffirmed the vital role it plays in helping the nation recover from disaster.

By Roberto G. Quercia and Kevin Park

Another epic storm – the foreclosure crisis – devastated America’s housing market in recent years. The fallout from that storm slashed housing prices by more than a third and wiped out $7 trillion in home equity. Nearly 11 million homeowners – including one in seven North Carolinians – remain “underwater,” meaning they owe more on their mortgages than their properties are worth. In this economic tempest, the Federal Housing Administration stepped in to key the recovery.

Friday’s news of FHA’s latest actuarial review showing its insurance fund holds a “negative economic value” may sound like cause for alarm – the latest in a string of institutions battered by the crisis. But what does this news really mean and how should we react? A bit of background may put it in perspective.

Congress created FHA 80 years ago – at the depth of the Great Depression – to stabilize the housing market. The agency provided mortgage insurance to wary lenders, encouraging them to resume making home loans during a time of great financial uncertainty.

FHA popularized the 30-year, fixed-rate mortgage. A fixture of U.S. home lending for decades, it allowed more Americans than ever before to own their own home. As a result, homeownership climbed 18 percentage points between 1940 and 1960.

As memory of the Great Depression receded and private institutions developed, the market became less dependent on FHA. In the lull between storms, recognition of its value declined. Then a new crisis hit.

When the housing market collapsed in the mid-2000s and private lenders fled, FHA once again stepped in. The agency’s share of the home purchase mortgage market soared, from under 5 percent in 2006 to nearly 38 percent in 2009, three years later.

Since 2008, FHA has helped nearly 4.2 million households buy a home and an additional 2.6 million homeowners, including many that are underwater, refinance to today’s lower rates. In North Carolina, FHA guaranteed the credit risk of more than 190,000 borrowers in the last five years. As it did during the 1930s, FHA provided the stability needed for the market to begin regaining its footing.

It is important to note that in the run-up to the crisis, FHA continued providing traditional mortgage products, such as the 30-year fixed, while many private lenders opted for wildly profitable but exotic and untested loans that ultimately caused the crisis. As a result, FHA’s business has performed significantly better.

Research from the UNC Center for Community Capital finds that only 14 percent of FHA-insured loans made between 2000 and 2008 were seriously delinquent or foreclosed upon compared with 32 percent of subprime mortgages, even though both served similar borrowers generally considered less creditworthy.

Friday’s news shows the agency is not exempt from high losses it sustained supporting the market. Projected losses for FHA’s insurance fund now exceed the $30 billion it holds in reserve to cover them. But given FHA’s current cash flow, the agency could continue paying claims for 10 more years.

FHA has faced this situation before, including in the early 1990s. Congress enacted reforms, and the fund restored its capital requirements in just four years.

This time, proactive reforms have increased premiums and banned unsound practices. As a result, while older loans continue to dog the agency, more recent business has been extremely profitable. The simplest way to recapitalize FHA’s reserves is to allow it to continue serving the market while reducing losses on troubled loans already on its books. Staying the course will keep the housing recovery on track and allow the agency to regain strength and continue its vital role in our economy.

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Roberto G. Quercia is director of the UNC Center for Community Capital at the University of North Carolina at Chapel Hill and professor and chair of UNC’s Department of City and Regional Planning. Kevin Park is a research assistant at the UNC Center for Community Capital and a Ph.D. student at the Department of City and Regional Planning.